IMPACT OF CORONAVIRUS ON 1031 EXCHANGES

IMPACT OF CORONAVIRUS ON 1031 EXCHANGES

Because we are fielding a variety of inquiries about the impact of Coronavirus on Section 1031 like-kind exchanges, we thought it would be helpful to post some information for public consumption.

What is a Section 1031 like-kind exchange?

• Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”), allows taxpayers to defer recognition of gain on certain real property where that real property is exchanged solely for real property of like kind which is to be held for productive use in a trade or business or for investment. The underlying rationale for this is that the taxpayer is continuing the investment, but simply in the form of a different piece of real property.

 

Who cares – how would Coronavirus even affect 1031 exchanges?

• Among a variety of other technical requirements, a replacement property must be identified by the taxpayer within 45 days of the sale and the taxpayer must close on the acquisition of the replacement property no later than 180 days after the initial sale.
• Given uncertainty in debt markets, real estate markets and the economy generally, we are seeing pending real estate transactions being terminated or extended, seeing force majeure and material adverse change clauses being invoked, and seeing increasing uncertainty as to whether buyers and sellers will be able to close their transactions.
• Accordingly, it may be exceptionally difficult for taxpayers to meet the foregoing timelines through no fault of their own.

 

Has the IRS extended, or does the IRS even have the authority to extend, the deadlines?

• The deadlines have not yet been extended.
• Section 7508A of the Code allows postponement of certain deadlines for taxpayers affected by a federally declared disaster or a terroristic or military action. However, this generally requires the IRS to specifically invoke this extension for the federally declared disaster at issue in the form of an IRS News Release or other publication. To date, the IRS has not issued such a News Release or other publication in connection with the Coronavirus pandemic.

 

So what should I anticipate?

• We expect the IRS to issue guidance and extend the deadlines in the very near future, as the IRS is under heavy pressure from the commercial real estate industry to do so. Moreover, the IRS has done so in the past in connection with events much less compelling than the Coronavirus crisis.

 

***This article is intended to be educational and is provided for your convenience. It does not constitute legal advice and it does not establish an attorney-client relationship between any reader and our law firm.